Question 1

A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?
A) The investment in subsidiary will decrease.
B) Additional paid-in capital will decrease.
C) Retained earnings will increase.
D) The investment in subsidiary will increase.
E) No adjustment will be necessary.

Accepted Answer

When the parent acquires all of the new shares of common stock at an amount greater than book value, the investment in the subsidiary will increase. This is because the parent is paying more than the subsidiary's recorded value for the new shares, which results in an increased value of the parent's ownership in the subsidiary. Additionally, there will be an increase in goodwill as a result of the purchase price being higher than the subsidiary's book value. The other options are incorrect because the investment in subsidiary would not decrease, additional paid-in capital would not decrease, and retained earnings would not increase as a result of this transaction.

Question 2

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:
A) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances.
B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount.
C) A gain or loss must be recognized by both parent and subsidiary companies.
D) Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process.
E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

Accepted Answer

The answer of The accounting problems encountered in consolidated intra-entity...

Question 3

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Compute the goodwill recognized in consolidation.
A) $800,000.
B) $310,000.
C) $124,000.
D) $0.
E) $(196,000.)

Accepted Answer

To compute the goodwill recognized in consolidation, we need to calculate the fair value of the net assets acquired and compare it to the consideration transferred. The fair value of the net assets acquired is calculated as follows:

Common stock: 
- Book value: $800,000 
- Fair value: $1,000,000 (80% x $1,250,000) 
- Excess fair value: $200,000

Preferred stock: 
- Book value: $310,000 ($775,000 x 40%) 
- Fair value: $310,000 
- Excess fair value: $0

Total excess fair value: $200,000

Since the total consideration transferred by Nichols was $1,324,000 ($1,200,000 for the common and $124,000 for the preferred), the goodwill recognized in consolidation is $200,000 ($1,324,000 - $1,124,000). Therefore, the correct answer is B.

Question 4

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Determine the amount and account to be recorded for Nichols' investment in Smith.
A) $1,324,000 for Investment in Smith.
B) $1,200,000 for Investment in Smith.
C) $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock.
D) $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock.
E) $1,448,000 for Investment in Smith's Common Stock.

Accepted Answer

When an investment in a company is made, the cost of the investment is recorded. In this case, Nichols has acquired 80% of Smith's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred for the common and preferred stocks are $1,200,000 and $124,000 respectively. Therefore, the entries to be recorded are:

Investment in Smith's Common Stock: $1,200,000
Investment in Smith's Preferred Stock: $124,000

These two entries represent the total amount of the investment in Smith, which is $1,324,000. Therefore, the correct answer is C.

Question 5

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?
A) Parent company earnings per share equals consolidated earnings per share when the equity method is used.
B) Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used.
C) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value.
D) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value.
E) Preferred dividends are not deducted from net income for consolidated earnings per share.

Accepted Answer

The answer of In reporting consolidated earnings per share when...

Question 6

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  The consolidation entry at date of acquisition will include (referring to Smith):
A) Debit Common stock $500,000 and debit Preferred stock $120,000.
B) Debit Common stock $400,000 and debit Additional paid-in capital $160,000.
C) Debit Common stock $500,000 and debit Preferred stock $300,000.
D) Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in capital $200,000.
E) Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000.

Accepted Answer

The answer of On January 1, 2009, Nichols Company acquired...

Question 7

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?
A) Any gain or loss is deferred on a consolidated income statement.
B) Any gain or loss is recognized on a consolidated income statement.
C) Interest revenue on the affiliated debt is recognized on a consolidated income statement.
D) Interest expense on the affiliated debt is recognized on a consolidated income statement.
E) Consolidated retained earnings is adjusted for the difference between the purchase price and the carrying value of the bonds.

Accepted Answer

Any gain or loss on the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition is recognized on a consolidated income statement. This is in accordance with the general principle of recognizing gains or losses when they occur instead of deferring them. Interest revenue or expense on the affiliated debt would also be recognized on the consolidated income statement. Consolidated retained earnings may or may not be adjusted, depending on the accounting method used for the acquisition. Therefore, options C, D, and E do not provide a complete or accurate explanation of the treatment of the debt acquisition on a consolidated income statement.

Question 8

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  If Smith's net income is $100,000 in the year following the acquisition,
A) the portion allocated to the common stock (residual amount) is $92,800.
B) $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at non-controlling interest in subsidiary income.
C) the non-controlling interest balance will be $27,200.
D) the preferred stock dividend will be ignored in non-controlling interest in subsidiary net income because Nichols owns the non-controlling interest of preferred stock.
E) the non-controlling interest in subsidiary net income is $30,800.

Accepted Answer

The answer of On January 1, 2009, Nichols Company acquired...

Question 9

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?
A) Parent's dividends would be subtracted as a financing activity.
B) Gain on sale of land would be deducted from net income.
C) Non-controlling interest in net income of subsidiary would be added to net income.
D) Proceeds from the sale of long-term investments would be added to investing activities.
E) Loss on sale of equipment would be added to net income.

Accepted Answer

The answer of What would differ between a statement of...

Question 10

Which of the following statements is true for a consolidated statement of cash flows?
A) Parent's dividends and subsidiary's dividends are deducted as a financing activity.
B) Only parent's dividends are deducted as a financing activity.
C) Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity.
D) All of parent's dividends and non-controlling interest of subsidiary's dividends are deducted as a financing activity.
E) Neither parent's or subsidiary's dividends are deducted as a financing activity.

Accepted Answer

The answer of Which of the following statements is true...

Question 11

Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2011, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2011.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.

Accepted Answer

The consolidated gain is calculated as the difference between the book value of the bonds and the purchase price. The book value is $20,000 (face value) + $2,000 (unamortized premium) = $22,000. The purchase price is $19,000. Therefore, the gain is $22,000 - $19,000 = $3,000.

Question 12

If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?
A) Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment.
B) There will be $0 net gain or loss on the bond transaction.
C) Interest expense needs to be eliminated on the consolidated income statement.
D) Interest revenue needs to be eliminated on the consolidated income statement.
E) A net gain or loss on the bond transaction will be reported.

Accepted Answer

If newly issued debt is issued from a parent to its subsidiary, it will result in a net gain or loss on the bond transaction due to the presence of any premium or discount on bonds payable or bond investment. Rest of the statements are true and accurate. Interest expenses and revenue must be eliminated on the consolidated income statement to avoid double-counting. The premium or discount on bonds payable is exactly offset by a premium or discount on bond investment, resulting in $0 net gain or loss on the bond transaction.

Question 13

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?
A) The parent's additional paid-in capital will be increased.
B) The parent's investment in subsidiary will be increased.
C) The parent's retained earnings will be increased.
D) The parent's additional paid-in capital will be decreased.
E) The parent's retained earnings will be decreased.

Accepted Answer

When a subsidiary issues new shares of common stock at an amount below book value, it results in a dilution of value for the existing shares. This means that the value of the parent's investment in the subsidiary will decrease. Since the new shares are sold at a price below the subsidiary's book value, the subsidiary's additional paid-in capital will be decreased. This is because the new shares are being sold at a discount, which reduces the total amount of additional paid-in capital. The parent's retained earnings are not affected by this transaction.

Question 14

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Compute the non-controlling interest in Smith at date of acquisition.
A) $486,000.
B) $480,000.
C) $300,000.
D) $150,000.
E) $120,000.

Accepted Answer

The answer of On January 1, 2009, Nichols Company acquired...

Question 15

These questions are based on the following information and should be viewed as independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2009, when Cocker had the following stockholders' equity accounts.  To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2012.
On January 1, 2012, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.
On January 1, 2012, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?
A) $0.
B) decrease it by $32,900.
C) decrease it by $45,700.
D) decrease it by $49,400.
E) decrease it by $50,500.

Accepted Answer

The answer of These questions are based on the following...

Question 16

Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2011, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2011.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 loss.
D) $3,000 loss.
E) $3,000 gain.

Accepted Answer

The answer of Stevens Company has had bonds payable of...

Question 17

Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?
A) Subsidiary net income is not affected by a gain on bond transaction.
B) Subsidiary net income is not affected by a loss on bond transaction.
C) Parent Company net income is not affected by a gain on bond transaction.
D) Parent Company net income is not affected by a loss on bond transaction.
E) Consolidated net income is not affected by a gain or loss on bond transaction.

Accepted Answer

The consolidated net income is not affected by a gain or loss on an intercompany bond transfer because it is eliminated during the consolidation process. However, the net income of both the parent company and the subsidiary may be affected by the gain or loss. Statements A, B, C, and D are all true.

Question 18

These questions are based on the following information and should be viewed as independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2009, when Cocker had the following stockholders' equity accounts.  To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2012.
On January 1, 2012, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.
On January 1, 2012, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company?
A) $0.
B) decrease it by $23,240.
C) decrease it by $68,250.
D) decrease it by $45,060.
E) decrease it by $43,680.

Accepted Answer

The answer of These questions are based on the following...

Question 19

If a subsidiary issues a stock dividend, which of the following statements is true?
A) Investment in subsidiary on the parent's books will increase.
B) Investment in subsidiary on the parent's books will decrease.
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
E) No adjustment is necessary.

Accepted Answer

The answer of If a subsidiary issues a stock dividend,...

Question 20

If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?
A) Additional paid-in capital on the parent company's books will decrease.
B) Investment in subsidiary will increase.
C) Treasury stock on the parent's books will increase.
D) Treasury stock on the parent's books will decrease.
E) No adjustment is necessary.

Accepted Answer

The answer of If a subsidiary reacquires its outstanding shares...

Quiz 6: Intercompany Debt, Consolidated Statement of Cash Flows, and Other Issues

A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?

Which of the following statements is true for a consolidated statement of cash flows?

If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?

Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?

If a subsidiary issues a stock dividend, which of the following statements is true?

If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?